10 Reasons Why People Cannot Get Out of Debt

Everybody knows that too much debt is bad; the financial universe is filled with blogs, experts, and gurus who tell us as much and even how to get out. So why is it that people cannot get out of debt? Is it because debtors behave badly, that they fail to adequately confront their credit problems—or are they just plain lazy?

Maybe, possibly in some cases, but I think there’s a lot more to it, and by the time you’re finished reading this list, you may have a better understanding as to why—if you’re deep in debt—you’re having such a tough time getting out of it. Knowing what you’re up against is the first step to solving a problem, and only when you do can you make any real progress.

1. Lack of sufficient income to do so

A lot of people are making less money than they were just a few years ago. They were making more money when they incurred their debt, but now the lower income level has them in a trap where they have barely enough money to pay living expenses, let alone pay off debt.

2. A rate of inflation that’s substantially higher than what is publicly reported

10 Reasons Why People Cannot Get Out of DebtOver time, expenses are growing faster than income, especially since raises are usually tied to the understated inflation rate (CPI). Does anyone really believe inflation is running at the 1-2% rate that’s claimed by the CPI? A 2% raise (again based on the CPI) will cause a drop in real wages in an economy where prices are rising by something closer to 5-7%. This is a very carefully hidden obstacle that requires either steadily lowering living expenses or being on a perpetual quest to find additional income sources. Many households are using credit to cover the difference, which is a strategy that’s destined to have an unhappy ending.

3. Conforming to a “standardized” idea of middle class life

When I was younger, if a family couldn’t afford a new car they bought a used one, and if they couldn’t afford that they bought a beater. If they couldn’t afford to keep their house, they sold it and moved to a rental or in with family. But in the past 20-30 years there’s been a kind of standardization of middle class life—how one must live and what one must own to live in it. Call it the “TV version” of middle class life. Many people can no longer afford to live this lifestyle, but they’re emotionally rooted in it and cannot abandon it. Once again, credit is often used to bridge the gap.

4. A benign view of debt

Culturally, debt is seen merely as a way to get from where you are to where you want to be. Want a house—take a mortgage. Need an education? Student loans can help. Can’t afford a car? Bring us your trade in and we’ll finance the rest. All of these require little or no money up front and make the process easy. Credit cards are just an extension of other forms of debt and a natural outgrowth. If debt is what “moves us forward” then how can it be a bad thing? Once you start thinking that way, you’re licked.

5. A culture that encourages debt at all levels

Credit is what moves the economy isn’t it? At least that’s what we’re told by those who are supposed to know. I’ve never agreed with this thinking. Money is what moves the economy–how it comes into being is the real issue. We can either earn it or save it—historically the preferred methods—or we can borrow it. The System—for lack of a better term—encourages us to borrow it since that’s the quickest way to make it happen. Once we have money—what ever the source—we can buy, buy, buy, and that’s what moves the economy. But when we use debt we’re also creating liabilities and they don’t go away once a paycheck shrinks or disappears.

6. A lack of orientation toward savings

Americans have a terrible track record when it comes to building savings, and we’re paying a huge price for it. Savings are the most fundamental antidote to debt—when we have plenty of savings we’re “self-financing” and don’t need debt. Building up savings is the first step to getting debt out of your life, and that requires a fundamental shift in financial thinking.

7. Too much structural debt

Over the past 20-30 years people have taken on too much structural debt. Mortgages and student loans are widely thought to be “good debt” but represent the foundation of even more debt. They’re long term debt, which creates the need for ever more cash later, and if it worked when you bought your house or your education it can work with anything else you buy, right? Mortgages and student loans can work if you don’t overbuy, then commit yourself to paying them off. For many people, however, mortgages and student loans set the stage for a lifetime of indebtedness.

8. An economic system that has a vested interest in keeping consumers in debt

Merchants have a symbiotic relationship to consumer debt—more credit equals more consumers, equals more sales, equals more profit. They’ll often provide the credit for you, all you need to do is come in and buy. This situation exists at nearly every level of the economy and, along with the media, it works to lower our resistance to consuming—and to going deeper into debt.

9. Habit

OK, this one is comes closest to being a pure personal fault by a debtor. Like smoking, drinking and over eating—people get into debt, learn to live with it and just continue on. If you want to break this cycle, it will require an effort comparable to a crash diet. Even though there’s long term benefit to doing it, the short term is uncomfortable and easy to avoid.

10. Debt has become a massive pyramid scheme

There was a time not long ago when lending was considered to be a fringe function in society; the old saw was “before you can get a loan you first have to prove that you don’t need it”. No longer. Credit is very easy to get and has been for a few decades. Because of that ease, lending has grown into a trillion dollar industry, with many layers. You can borrow with the swipe of a credit card, and when your revolving debt reaches the point where you can’t manage it, you can consolidate it with a home equity line of credit (HELOC). When the HELOC gets stressful, you can consolidate it with a new first mortgage on your home. See the trend? If it weren’t so legitimized in our culture and economy, we might be able to identify it as the pyramid scheme that it truly is. Nothing in that system is set up to encourage us to get out of debt, but just to roll it over to more tolerable loans.

As you can see, the obstacles to getting out of debt are enormous. It’s not just your bad habits and lack of discipline that are keeping you in debt, you’re getting a lot of help from a culture that’s keeping you in that ditch. This isn’t an attempt to give debtors a pass or to deflect responsibility, but rather to paint a full picture of the true obstacles.

If you have a serious amount of debt to payoff you need to…

Understand the big picture obstacles you face in trying to get out of debt

Make a concentrated effort to resist those obstacles by setting and living by your own standards and preferences

Be fully prepared to lower your standard of living as low and for as long as it will take—separate wants from true needs

Stop using credit going forward

Be ready to increase your income—if you’re paycheck doesn’t increase to cover the true cost of living or paying off debt, then be ready to do what you need to find additional sources

Make savings—and not borrowing—the standard of your financial success

Once you’re out of debt, vow never to get back in.

You may not have the entire blame getting into debt, but rest assured you’re 100% responsible for getting yourself out.

Hi Kevin–I agree, and overcoming that one will take all that we have. It probably starts in elementary school, but there’s something deep inside us that desperately wants to be like everyone else in the group, so we do our best to conform to the standard, what ever it is. It’s the same reason why people will engage in behaviors in groups that they never would individually.

Being part of a group–in this case the middle class–costs money and forces us to do things that may not be in our own best interest. But success in nearly any endeavor usually requires being different, and that takes more effort than conforming to the group. At that point we’re bumping up against #9, Habit!

I think if we could travel back in time & show our great-grandparents & great-great-grandparents the current state of household finances it would literally kill them! Although this could potentially trigger a catastrophe in the space-time continuum (grandfather paradox), I’m pretty certain the high debt vs low income road we’re traveling on right now would be so foreign & inconceivable to them.

My great-grandparents (survivors of the Great Depression) tried to teach me money-management when I was a kid, but I didn’t listen. I regret that decision everyday (and every month when I make the payments on my dumb debt mistakes)!

Hi Dave–In a way it was easier to learn good money habits back in your grandparents day. For one thing there was far less to buy (consumer goods, new car every five years, etc) and for another there was no way to pay for it if you didn’t have the money. All that was left was financial discipline and you literally needed it to survive. My grandparents said that during the Depression they didn’t feel as if they were doing without because nobody else had much either. Today even people who can’t afford it seem to have everything. It’s that standardization burden we’re carrying again. People today have everything because they can, thanks to credit. Culture and norms most definately play a role in the debt trap.

This is totally spot on. I especially believe the “standardized” view of the middle class. People don’t downsize to what they can afford, they take out loans and pay it off later. Our culture definitely promotes this idea that debt is okay, as does our habits. It’s “normal and everyone does it”. Great post.

Thanks Carrie. I definately think the normalization of debt at all levels has contributed. We’re choking on that thinking right now. What it really means more than anything else is a personal rejection of current standards. That can make you an “oddball” but it’s a price that has to be paid. Conformity has gotten super expensive.

Hi JG–True, but I think that it also means that we need to be very reluctant to going deeper into debt going forward. If we know that there are economic and social factors (in addition to our own issues) that conspire to get us in debt and keep us there, we need to do all that we can do avoid going there at all. That’s a strong argument for reigning in living expenses and working to find extra income sources. The big picture game is changing so we need to change our behavior to adjust.

i think No 1. is very important. people who are in debt forget why they’re in debt in the first place. it’s because they spent more than they made. that’s ultimately the bottom line. if they don’t change their spending ways and reduce their expenses, there’s no way to reduce debt. formula just doesn’t work that way.

Hi Charles–I was writing point #1 though based on the fact that a lot of people are earning less than they did five years ago, not so much a mismanagement issue. A lot of people lost jobs and had to take new ones paying less, while those who didn’t lose jobs found themselves going years without raises at a time when living expenses rose. Either way, they’re quite literally earning less than they did a few years ago.

I see this more as a weakness of economic structure (big picture) than of personal choice or miscalculation.

Thanks Bill! I know the conventional explanation for so many people being in debt are the standard “lack of responsibility”, but I’m never entirely comfortable with conventional explanations. Debt has become something of a cultural norm, and it’s being driven by tangible reasons that are having a definate impact, while floating just below the level of public awareness.

Great list Kevin! I agree with all of them, but I think #9 is spot on. I think for many that it just becomes a way of life, whether they choose that actively or not and they see no need to get out of it.

Hi John–Yes it very much becomes a way of life. But credit has also been the unfortunate brigde that enables people to survive with all of the pressure from the other 9 reasons, so maybe the habit is an involuntary response to a difficult situation. I’m speculating of course.

Here, we’re frugal as anything and try to get out of the debt cycle – but it’s definitely difficult to break out of the rut of debt because there are so many messages and so many signals which encourage us to spend like that. I think that it all comes down to being mindful about each purchase, combined with a touch of impulse control.

Hi Emily–I think its really important to tune out the world to the greatest degree you’re able (like really, REALLY(!) important). We’re getting too many cues telling us to borrow, and that it’s perfectly OK. We have to retrain ourselves to relize that it’s not OK, that it’s really a trap.

That’s not as easily done as said, because of all the other factors that contribute, such as the high – and getting higher -cost of living. But it’s an effort we all need to make.

These are excellent points. We are all getting squeezed by the higher expenses and taxes and the stagnant wages (business owners don’t have wages but they are still getting squeezed in other ways). We must face reality. Just going on the way we always have will actually put us into debt. The game has changed. We need new strategies and attitudes. Gas prices and food prices alone have skyrocketed and come directly out of the bottom line.

I know you can’t control the ads on this blog, but it’s ironic that a prominent ad says “Do you need a loan to get out of debt?” If you are taking out a loan, you are not getting out of debt! Yes, sometimes “restructuring” of debt can help but that is a very tricky business.

Hi Cathy – The problem is that all of those reasons are so subtle in the way they work that we don’t realize the impact they have in keeping people in debt. It calls for a change in lifestyle, since paying off debt isn’t nearly as easy as getting into it.

I’ve recommended on against debt consolidation in the past because it’s mostly a way to repackage debt without paying it off. Sometimes that works, but most of the time it just enables you to take on new debts after the old ones have been consolidated.

One huge reason that you did not mention is medical debt. Even with good insurance, deductibles and co-pays can be enormous and many people have limited paid leave.
In my case, I missed so much work for valid medical reasons, that I used up all of my various forms of paid leave and went off payroll for a week. When I go off payroll, my insurance will not pay, nor will I accrue paid leave and money towards my retirement, etc..
Not to mention that I can no longer take any sort of vacation, even a staycation because I have no hours to take one.
I do have a decent emergency fund built up (about $8,000.00 and growing) but I really want to save most of it towards retirement.

Hi Mary – You’re 102% right about that! Over the past few years, people and employers have had to opt for more restricted health plans and often with higher deductibles and co-payments. And since health issues are often accompanied by temporary income disruptions, the problem is magnified. Then there are uncovered procedures, where you’re on the hook for the entire amount, something you often don’t find out about until after the fact. I’ve heard that medical costs are the #1 reason for bankruptcies, which is easy enough to see. Great catch Mary, thanks!

People often get caught in a catch-22 situation where they try desperately to get out of debt but because they pay so much to debt service, they don’t have cash available when something unexpected comes up. I know this happened to us before; that is, before emergency fund. We had about $7000 on credit cards and I was desperate to pay it off. So every month, I’d pay a huge amount. Then sure enough, something would pop up and because I’d given all our spare money to the credit card company, I had nothing left to pay the expense and back on the credit card it would go. Once I got off that merry-go-round, I started building a reserve account that now can be used for the unexpected and we are also totally debt free.

Thank you Kathy, you’ve proved a point that I’ve been trying to make for years. That getting out of debt requires a healthy amount of savings. Once you have that, you’re no longer dependent on credit lines to cover unexpected expenses, and you’re able to get serious about getting out of debt. Throwing all of your extra cash into debt payoff may seem right, but it usually doesn’t work. The debtor then loses hope of ever getting out of debt, and goes deeper in. To get out of debt, you have to change your financial lifestyle, and that means prioritizing savings. Once you no longer need credit, you can make it go away.

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